WASHINGTON - The Federal Reserve reported Wednesday that although the economy continues to expand, loan demand has slowed.
In the new Beige Book, the Fed's periodic survey of regional economic conditions, the central bank said economic growth remained "vibrant."
But the survey found that "expansion in bank loans slowed, led by weaker demand for home mortgage, home equity, and residential construction loans."
"Higher mortgage interest rates appear to have slowed single-family housing activity, but multifamily residential and commercial construction remained relatively strong," the Fed added.
James Chessen, chief economist for the American Bankers Association, said that although banks are already feeling the effects of the Fed's past six rate increases in slower home mortgage lending, strong auto sales serve as a bright spot for banks this year.
"Half of the consumer lending by banks is auto related," said Mr. Chessen. He believes consumer credit will stay relatively strong, but said 1994 was "the peak of loan demand for both the consumer and the business side."
Lyle E. Gramley, a consulting economist with the Mortgage Bankers Association of America, said the economy's underlying strength should help lenders.
"Banks probably face another six months of very good loan demand," he said. "When businesses are adding to inventories as they are now, this generates quite a bit of short-term credit demand."
The Fed reported, "Most districts indicated that commercial and industrial loan demand remains relatively strong." But "a number of districts reported slower growth or declines in business loan demand," the report added.
The Fed's 12 district banks prepare the Beige Book every six weeks in anticipation of the Federal Open Market Committee meetings, at which interest rate policy is set. The next meeting is set for Jan. 31 and Feb. 1.
Several economists said that report shows that the Fed is likely to raise rates by 50 basis points at its next meeting.
David L. Littmann, senior economist at $35 billion-asset Comerica Bank in Detroit, said the Beige Book shows the Fed has "no choice" but to raise interest rates when it next meets.
"This report motivates a further increase in interest rates, at least a half a percentage point at the end of this month, and probably more beyond," Mr. Littmann said. Mr. Chessen and Mr. Gramley agree that a 50- basis-point rate increase is the most likely outcome of the next meeting. Any rate changes are expected to be announced on the second day of the meeting, Feb. 1.
The Fed will be more likely to raise rates because for the first time in years, the Beige Book shows that California's economy has strengthened, Mr. Littmann noted.